At around $25 late last week, Kraton (ticker: KRA) was above its 52-week low of $14.37, set in October amid concern about a sluggish economy in the U.S. and Europe. But it was still well below its 52-week high of nearly $48, hit last April.

"Investors buy [chemical companies] when they feel good about the economy, and they sell them down hard when they get worried, and that's basically what happened," says Edward Yang, an analyst at Oppenheimer Equity Research. He rates Kraton Outperform, with a 12-to-18-month target of $43.

Launched in the mid-1960s as part of Shell Chemicals, Kraton was spun off from its parent in 2001. More recently, it was owned by two private-equity firms, TPG Capital and JPMorgan Partners. The company went public in late 2009.

Yang and others argue that the market is treating Kraton like a commodity chemical company, even though it has rolled out innovative value-added products, including allergy-resistant surgical gloves and a substitute for PVC plastic that is more environmentally friendly than that material.

Bulls note that the company has a strong global footprint, market-leading positions in many of its products and good overseas growth prospects, particularly in China.

Its stock valuation hardly reflects any of that. Late last week, the company was trading at about 8.5 times the $2.98 a share that analysts expect it to earn this year, down from $3.50 in 2011. The problem: raw materials, a big part of Kraton's costs, are volatile and hard to predict. In the third quarter, it earned $1.33 a diluted share, up from 88 cents a year earlier, on $402 million, thanks largely to price increases that the company passed along. Volume, as measured by tonnage, fell 4%.

Kraton is expected to report a loss for the fourth quarter, owing to its use of FIFO (first in, first out) inventory accounting. After surging through the summer of 2011, prices of butadiene, a crucial raw material on which no hedges are available, began to fall. The North American butadiene contract price for January is settling at $1.06 a pound, down from $1.77 last August, according to Yang. Butadiene, styrene and isoprene account for about 55% of Kraton's cost of goods sold.

Under FIFO, the higher costs didn't show up until late last year and will pummel fourth-quarter results. Analysts expect a 27-cents-a-share loss, with sluggish volume also hurting the numbers. The good news: Kraton has been able to pass along a lot of the raw-material increases to customers. And the higher-cost inventory from last year won't last indefinitely. "You have to look through the noise of that inventory accounting in the near term," says David Goldsmith, an analyst at Baron Capital Management, which holds Kraton shares.

Another wrinkle with raw materials is that when their prices start to decline, customers sometimes hesitate to buy, hoping for better deals down the line. That hurt Kraton toward the end of last year, as customers ran down their inventories. But butadiene prices have started to tick back up. "They are starting to get emergency orders, and now that butadiene prices are rising again, you will likely see customers get off the sidelines and restock," says Yang, who recommends buying the stock on any dips.

Kraton divides its SBCs into two categories: USBCs, used in products for paving, roofing, footwear, adhesives and sealants, and higher-margin HSBCs, which are more complex and whose uses include soft-touch rubber razor and toothbrush handles, along with IV bags in hospitals. HSBCs account for about one-third of sales, and the company is gradually tilting its sales mix toward them.

CEO Kevin Fogarty recalls that, when he took over in 2008, roughly a third of Kraton's products were unprofitable, and the company repriced its wares only annually, preventing it from adapting quickly to spikes in raw-material costs. Fogarty discontinued 5% to 7% of the unprofitable lines and raised prices on the rest. "We were the market leader, but we weren't behaving as such," says Fogarty, 46. It now gives customers a 30-day notice on price changes. Kraton also deemphasized footwear, a low-margin line.

One promising area is isoprene rubber latex, a "non-allergenic" substitute for natural-rubber latex that is used to make condoms and surgical gloves. It's by far the company's fastest-growing segment, albeit off a modest base; sales rose 35% in the third quarter, to $26 million.

With an enterprise value (market value plus net debt) of $1.17 billion and strong growth prospects, Kraton would be an attractive acquisition target, but Fogarty thinks the company can do quite well on its own.